BREAKINGVIEWS-Fund managers are losing patience with India

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)

By Jeff Glekin

MUMBAI, April 24 (Reuters Breakingviews) - When it comes to
India, fund managers are sitting on their hands. Foreign flows
into the country's equity market have trickled to a halt this
month. Ambiguity over tax rules is a major reason why investors
are holding back. India's fragile economy can't risk an exodus.
But it still has time for a re-think.

Overseas investors have only invested $172 million in Indian
equities so far this month. That compares with an average of
around $3 billion a month which was invested in the first
quarter of this calendar year, according to the Securities and
Exchange Board of India. The benchmark SENSEX index is down
around 8 percent from its pre-budget high on February 21. The
rupee hit a three month low on April 24.

Worries about India's economic growth and the global
sell-off triggered by renewed jitters over the euro zone may be
partly to blame. But fund managers also point to uncertainty
over changes to Indian taxation. Proposed rules prompted the
$1.5 billion Macquarie Asian Alpha Fund to exit short positions
in Indian single stock futures, Reuters reported on April 23.

The prospect of a retrospective charge on foreign
investments, aimed mainly at Vodafone's purchase of Hutchinson
Whampoa's Indian assets, has affected sentiment. But there is
also ambiguity over the country's proposed 15 percent tax on
short-term capital gains. In spite of some reassuring platitudes
from the finance minister during his visit to the United States
last week, nothing has actually changed.

New Delhi can't afford to keep investors guessing. India's
trade deficit hit a record high of $185 billion for the most
recent fiscal year, up from $104 billion in the previous 12
months. Even if net capital inflows from foreign investors and
remittances by foreign workers remain steady at around $120
billion, the country faces a $60 billion shortfall. But if
foreign direct investment and portfolio investment dry up, the
gap could double to $120 billion.

Fortunately, there is an easy enough remedy. The finance
bill has yet to be made law. If India removed all efforts to
retrospectively change the tax code and made crystal clear how
the anti-avoidance rules will impact institutional investors, it
could help to lift the uncertainty.

CONTEXT NEWS

- Overseas investors have invested just $172 million in the
Indian equity market so far this month. That compares with $1.7
billion in March, $5.1 billion in February and $2 billion in
January, according to data taken from the Securities and
Exchange Board of India's website on April 24.

- Foreign institutional investors currently hold around 17
percent of the total market for Indian equities, equivalent to
around $200 billion.

- The $1.5 billion Macquarie Asian Alpha Fund has exited its
short positions in Indian single stock futures in response to a
controversial set of proposed tax rules that could lower
investment returns, Reuters reported on April 23.

- Investors fear that New Delhi will use changes to tax low
that could trap Vodafone to snare offshore institutions
as well. At the heart of their concerns are two provisions. The
first gives India the power to retroactively tax the indirect
transfer of assets, which was widely seen as targeting
Vodafone's $11 billion purchase of Hutchison Whampoa's Indian
assets.

- The second targets tax evaders via the General
Anti-Avoidance Rule (GAAR) and may expose investors to a 15
percent short term capital gains tax.

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